It is important to understand the focus of Senate Bill 1302. It provided that for a loan in the amount of $1 million or more (which amount has been increased to $3 million or more by the 2013 legislation), when an IDOT is used, the secured debt is deemed to be incurred if and to the same extent as debt is incurred on a guaranteed loan. Also, in these situations the recordation tax applies in the same manner as if the guarantor were primarily liable.
The Theory of IDOTs A law that, with its predecessor statutes, has been in the Maryland Code since 1939 provides that recordation tax is not due on an instrument of writing except to the extent that debt has been incurred under it. See §12105(f) of the Tax-Property Article of the Maryland Code (“TP”). The theory behind IDOTs is that the liability of the grantor of the IDOT is based on a guaranty of a loan made to a different entity (the borrower), but that at the time of recordation of the IDOT no indebtedness has been incurred by the grantor of the IDOT. This is because the guaranty provides that the guarantor is not liable unless and until the borrower defaults under the loan. Three published opinions of the Maryland Attorney General support this interpretation of TP §12105(f). TP §12105(f) applies in several different instances, including the following: 1. A “true indemnity” situation in which one party agrees to be liable to another party upon the occurrence or non-occurrence of a particular event and the first party secures its obligation by giving a mortgage or deed of trust (the IDOT) on its property to secure the agreement. An example of this type of IDOT is when a bank issues a letter of credit for a customer and the customer secures its reimbursement obligation with an IDOT. This type of IDOT may also exist in other contexts, as discussed below. 2. In a construction loan in which a lender agrees to make, for example, a $50 million loan to a borrower to construct a building, but the borrower only draws down $5 million at the time of the loan closing. Under TP §12-105(f) the borrower may pay recordation tax on the $5 million when the loan closes and then pay recordation taxes on the additional loan advances as they are made over time. 3. To a loan that is made to a person who does not own the real property that is security for the loan, if the loan is guaranteed by the landowner who encumbers its property with an IDOT to secure the guaranty. The requirement for this is that the guaranty may not be primary. Until the guarantor becomes primarily liable, the debt has not been incurred for purposes of TP §12-105(f). It is only the third type of IDOT that was affected by Senate Bill 1302 and the 2013 legislation in the manner stated above. In so limiting the reach of TP §12-105(f) to certain IDOTs, Senate Bill 1302 and the 2013 legislation had the effect of validating other types of IDOTs.
www.homebuilders.org
An obvious example of the kind of IDOTs that have been endorsed by the General Assembly are those IDOTs that are issued in loans for less that $3 million, which should not be taxable when they are recorded.
Deposit Mortgages Another type of situation where IDOTs will not be affected by Senate Bill 1302 or the 2013 legislation involves deposits for the purchase of real property. Often, a developer or builder will contract to purchase real property and agree to make a cash deposit. The seller is interested in using that cash deposit immediately. That would be fine if the transaction closes as provided for in the purchase and sale agreement because then the seller would be entitled to the unrestricted use of the deposit. However, there is always the possibility that the conditions for closing may not occur or that the seller may default so that the buyer cannot or chooses not to close. Then the seller will be obligated to return the deposit. In order to account, for some issues that may arise, the parties may agree that the seller may take the deposit when it is tendered under two conditions. First, the seller must agree that if the transaction does not close because of a failure of a condition precedent or if the seller defaults, the seller is obligated to repay the deposit to the buyer. Also, the seller may agree to secure its repayment obligation with a mortgage or deed of trust. This security instrument will be an IDOT of the type described in the first example above. It does not involve a loan. Instead, it secures the repayment of a deposit under circumstances that may or may not occur. Therefore, the instrument should be recordable without the payment of recordation tax. Neither Senate Bill 1302 nor the 2013 legislation reaches this type of IDOT. The discussion above relates to the possibility that the seller defaults under the purchase and sale agreement. Consideration should be given to the possibility that the buyer defaults by not closing on the transaction even though all closing conditions have occurred. In that circumstance, the seller will find that there is an IDOT of record that should no longer encumber its property. If the buyer refuses to release the IDOT after request, it would be helpful to the seller if in the IDOT the seller was granted a power of attorney from the buyer to release the IDOT if the buyer refuses to do so under the facts described above. Then the seller, acting on behalf of the buyer, may file a release of record so that the IDOT will not show up as a lien when a title search is performed. n
Edward J. Levin is a member of Gordon Feinblatt LLC and was a member of the Indemnity Mortgage and Deed of Trust Workgroup under Senate Bill 1302. Copyright Edward J. Levin 2013. All rights reserved.
JULY/AUGUST 2013 MID-ATLANTIC BUILDER
17